Should we tweak the Dragon's tail?

Questions about China's currency all come down to whether or not the U.S. should put pressure on China to appreciate the yuan. As the U.S. decides once again whether or not to brand China a "currency manipulator" (a move which would allow retaliatory trade measures), this debate has spilled over into the blogosphere.

Paul Krugman is in favor of pressure:

[R]enminbi appreciation is clearly indicated, for China’s own sake, not just to head off the outraged reactions of the rest of the world.

There are obviously political considerations keeping the Chinese from doing the right thing. But with a little encouragement — say, a Treasury report saying that yes, they do manipulate their currency — things might happen.

Yglesias is against:

I think that’s backwards. You don’t need a Nobel Prize to figure out that a degree of renminbi appreciation would keep a lid on inflation and is probably what the doctor ordered. But a Treasury report demanding that China revalue its currency is going make the “political considerations” worse, not better. The leaders of self-respecting great powers don’t like to be seen as getting bossed around by other great powers’ Treasury departments.

And Ryan Avent, writing at The Economist, agrees:

Matt Yglesias says what needs to be said about whether having Treasury urge China to revalue is a good, likely-to-be-productive idea or not. It isn't. What's striking to me about the Paul Krugman post to which Mr Yglesias refers is the idea that the Chinese aren't perfectly aware of their own economic situation. They're not idiots. They know they need to let the RMB appreciate, and they'll do it eventually.

Now, Avent pretty much has to say this, since he works for The Economist; renminbi appreciation would raise labor costs for Western multinationals (and possibly - gasp! - labor's share of income in Western countries), and The Economist never saw a lower labor cost it didn't like.

As for Yglesias, he's quietly given up his very misinformed idea that the U.S. printing money will be equivalent to China appreciating the renminbi (read the Krugman blog post to realize why this is not correct). But foreign policy is still his biggest concern; Yglesias is more scared of starting a new Cold War than he is worried about U.S. workers' share of national income.

More broadly, Yglesias is one of the main proponents of the theory that U.S. pressure on non-allied countries has the opposite of the intended effect. He may in fact be right about this. Krugman, for his part, typically nails the economics of any given situation, but only slowly recognizes the political feasibility of his recommendations; it may be the case that we have nothing to gain from shouting at China over its currency, and our best bet is simply to wait and let them do it themselves.

In any case, the U.S. is highly unlikely to brand China a currency manipulator. The move would be useless grandstanding unless we intended to actually take protectionist measures against China - and almost everyone is still too scared that protectionism will upend our fragile economic recovery. After 8 years of watching Bush's "all bark no bite" strategy go down in flames, American leaders have pretty much realized that we shouldn't start making demands unless we're prepared to back them up.

Update: Krugman lays it down.